Cash & Securities

How cash and securities are held at banks and brokers

A legal and operational guide for investors, treasurers and sophisticated private clients

Contents: 1. Why it matters · 2. Securities custody · 3. Cash deposits

1. Why it matters

Most investors assume that the balance in their banking or brokerage portal sits in an account that belongs to them alone, a digital safe deposit box. It does not. The legal form in which an asset is held decides what happens to it when the bank or broker fails, and it decides five things:

1. Ownership. Whether the investor holds a property right in a specific asset or only a contractual claim against an intermediary.
2. Insolvency treatment. Whether assets are returned directly or must be claimed in competition with other creditors.
3. Protection. Which regime applies: investor compensation, deposit guarantee or client asset rules.
4. Concentration risk. Hidden reliance on a single custodian, central securities depository or deposit-taking bank.
5. Dependencies. Counterparty and operational exposure across several jurisdictions and tiers of intermediation.

One distinction underlies everything that follows. Securities are held in custody: the client remains the beneficial owner, and on the intermediary’s insolvency the securities are returned in kind. Cash is held as a deposit: the bank becomes the owner of the money, and the depositor holds only a claim for repayment.

2. Securities custody

2.1 Dematerialisation and the custody chain

Physical share and bond certificates have largely given way to electronic book entries, a change forced by the paperwork crisis that rising trading volumes created in the second half of the twentieth century. The result is a chain of intermediaries between the issuer and the investor:

• The issuer sets the terms of the securities (voting, dividends, redemption, corporate actions) but no longer deals with most of its holders directly.
• The central securities depository (CSD) keeps the authoritative register and runs settlement on a delivery-versus-payment basis: the DTC in the United States; Euroclear and Clearstream as international CSDs alongside national CSDs in Europe; Euroclear UK & International, which operates CREST, in the United Kingdom.
• Participants, such as custodian banks, prime brokers and large broker-dealers, hold accounts at the CSD and in turn keep accounts for their clients, who may themselves be intermediaries.

A typical chain therefore runs from issuer to CSD to global custodian to sub-custodian to broker to investor. Each tier records which positions belong to which client and holds an aggregate position at the tier above. The investor rarely appears on the issuer’s register; the registered holder is usually the CSD or its nominee. The investor holds a beneficial interest, and a body of law ensures that dividends, interest, votes and corporate actions still reach the beneficial owner.

2.2 Omnibus accounts

An omnibus account pools the securities of many clients of one intermediary in a single account with the next intermediary up the chain. The intermediary’s own books allocate the positions to individual clients; the custodian or CSD sees one large position and need not know the clients behind it.

Omnibus accounts exist for good reasons. Transactions can be netted: ten buyers and ten sellers of the same security settle as one net position, not twenty settlements. The CSD deals with a manageable number of participants instead of millions of investors, and the market standardises around one model.

The decisive legal question is whether pooling destroys the investor’s property right. In a sound custody regime it does not, provided the law recognises beneficial interests in fungible pools and the intermediary keeps accurate records. Common-law systems use trust or equitable principles; civil-law systems use co-ownership, segregation duties and statutory protection. Either way, the intermediary is not the owner of the client securities it holds; it is their custodian.

2.3 Segregation of client assets

Protection depends on strict segregation at three levels: legal (client securities are not available to the intermediary’s creditors), accounting (they are held off-balance-sheet in custody accounts) and operational (they sit in designated client accounts at the custodian or CSD).

• EU, MiFID II. Article 16(8) of Directive 2014/65/EU requires investment firms to safeguard clients’ ownership rights, especially on insolvency, and forbids use of client instruments on own account without express consent. Article 2 of Delegated Directive (EU) 2017/593 requires records that distinguish, at any time and without delay, each client’s assets from those of other clients and of the firm.
• EU, CSDR. Article 38 of Regulation (EU) No 909/2014 requires CSDs to offer participants at least omnibus client segregation and individual client segregation, so that client securities are always separate from the participant’s own.
• United Kingdom, CASS 6. Custody assets are registered in the client’s name or a nominee’s, reconciled daily against third-party records and reconciled externally at intervals. Client assets are held on trust and are not available to general creditors.
• United States, SEC Rule 15c3-3. Broker-dealers must keep possession or control of fully paid and excess margin customer securities and may not use them to finance proprietary business. The Securities Investor Protection Corporation (SIPC) advances funds for missing securities up to set limits when a broker-dealer fails.

2.4 When the intermediary fails

In principle, client securities are returned to clients rather than falling into the insolvent estate. In practice, three frictions arise:

1. Reconciliation. The insolvency practitioner must match the intermediary’s internal records with the positions actually held at custodians and CSDs. With good books this is routine; with poor books, often a feature of fraud, it is slow and contested.
2. Shortfalls. Where the books show more securities than custody holds, because of unauthorised pledging, unsettled trades recorded as complete, fabricated positions or accumulated error, clients usually share the loss pro rata and claim the balance as unsecured creditors.
3. Cost and time. Fees of insolvency practitioners, lawyers, accountants and forensic specialists are deducted from the assets available. Simple cases take months; complex cross-border failures can take years.

Special regimes reduce these frictions. In the United Kingdom, client asset distribution rules and the Investment Bank Special Administration Regulations 2011 give priority to the rapid return of client assets, and investor compensation schemes provide a backstop up to set limits.

3. Cash deposits

3.1 A deposit is a loan to the bank

Cash deposited with a bank, directly or through a broker, creates a relationship of debtor and creditor, not of custodian and owner. Ownership of the money passes to the bank. The depositor acquires a contractual claim (a chose in action, in common-law terms) to repayment of an equivalent sum on demand or on the agreed terms, usually with interest. The bank may use the money as it sees fit: to lend, to buy securities, to meet capital requirements.

This is not a technicality awaiting reform. It is the basis of fractional-reserve banking: banks borrow short and lend long, and that maturity transformation is possible only because deposited money belongs to the bank. If deposits were held in custody, banks could not lend them, and credit creation as we know it would stop.

The price is credit risk. If the bank fails, the depositor is an unsecured creditor and shares in what remains; in severe failures that may be little or nothing. Deposit guarantee schemes soften this risk up to set limits, but they do not change the legal position: a deposit remains a claim, not property.

3.2 Client money at brokers: two layers

Cash held with a broker involves two relationships and two possible failures.

• Investor and broker. Under client money rules (CASS 7 in the United Kingdom, the MiFID II client money requirements in the EU), the broker holds client cash on trust or under a similar fiduciary arrangement, separate from its own funds. Without such rules, the investor may simply be an unsecured creditor of the broker, with client cash mixed into its operating funds.
• Broker and bank. The broker, or the client money trust, is a depositor of the bank where the cash actually sits, with the same contractual claim described above.

If the broker fails and the banks remain sound, properly segregated client money can be returned or transferred to another broker relatively quickly, provided segregation, reconciliations, balances and records were maintained. If a bank fails and the broker survives, the broker must claim against the failed bank and pass any recovery to clients, often limited to the deposit guarantee and delayed by the insolvency. The worst case, both failing together in a systemic crisis, combines both sets of problems, often across several jurisdictions.

3.3 Deposit guarantee schemes

Deposit guarantees protect retail depositors, prevent runs and preserve confidence in the banking system.

• European Union. The Deposit Guarantee Schemes Directive (2014/49/EU) covers eligible deposits up to EUR 100,000 per depositor per credit institution (Article 6). Deposits of financial institutions acting as such, deposits linked to a money laundering conviction and certain professional financial undertakings are excluded (Article 5). Payout must be available within seven working days (Article 8). Under Article 7, pooled accounts held for identified or identifiable beneficiaries are looked through, so each client of a broker or payment institution is protected for its own share rather than the whole pool being treated as one EUR 100,000 deposit.
• United Kingdom. The Financial Services Compensation Scheme protects deposits up to GBP 120,000 per person per authorised deposit-taker (since 1 December 2025). Temporary high balances arising from specified life events, such as the sale of a home, an inheritance, insurance or personal injury compensation, or a divorce settlement, are protected up to GBP 1.4 million for six months.
• United States. The Federal Deposit Insurance Corporation insures deposits up to USD 250,000 per depositor, per insured bank, per ownership category (12 U.S.C. § 1821; 12 C.F.R. Part 330). Individual, joint, retirement and trust accounts are covered separately; joint owners are insured for their own shares; revocable trust accounts are covered up to USD 250,000 per unique beneficiary, subject to limits; corporate accounts are insured at entity level. Where a broker sweeps client cash into insured banks, pass-through coverage (12 C.F.R. § 330.5) insures each client up to USD 250,000 for its share, provided the bank’s records disclose the agency relationship and the names of the owners, and the funds belong to the clients.